IBM on Thursday reported mixed financial results for its second quarter ended June 30. Despite increased profits and a couple of encouraging trends, revenues declined for the ninth consecutive quarter.

The biggest drag on IBM's results continued to be its Systems and Technology (hardware) business, which was down 11.4% from the prior-year quarter to $3.3 billion. Revenues for Global Technology Services (-1.3% to $9.4 billion), Global Business Services (-1.6% to $4.5 billion), and Software (+1% to $6.4 billion) were essentially flat. Total quarterly revenue was down 2.2% to $24.3 billion.

Despite declining sales, IBM's net income increased 28% over the prior-year quarter to $4.1 billion. The profit difference was mainly due to a $1 billion workforce rebalancing write-off in the second quarter of 2013, an annual move that was pushed into the first quarter of 2014.

In the Systems and Technology segment, mainframe sales held up with a 1% decline, and the System X X86 server line had a 3% decline. The loss leader continued to be the IBM Power line, which was off 28%. Among the encouraging signs was that declines in this segment weren't as steep as in recent quarters, which IBM CFO Martin Schroeder described as a sign that the hardware business is stabilizing. Another encouraging sign was a less-steep decline in China in the second quarter, where sales shortfalls were acute in 2013.

IBM is selling its low-margin System X business to Lenovo, but that deal is still pending regulatory approval. Rumors have also been circulating that IBM is trying to sell its chip-manufacturing operations, with plants in New York and Vermont, to GlobalFoundaries. But the Poughkeepsie Journal, citing sources close to the matter, reported this week that those talks have stalled. The on-again, off-again talks with Lenovo dragged on for more than a year before they settled on a price for the X86 business.

IBM's strategy has long been to get out of low-margin businesses and to invest in important growth areas. This week the company announced a high-profile mobile alliance with Apple, which is seen as driving big-data and analytics opportunities for IBM. Last week the company announced a $3 billion commitment to stay in the research and design aspects of the chip business by investing in next-generation nanoscale technologies, seen as replacing today's silicone-based chips.

In June, IBM announced a revamped Bluemix platform-as-a-service offering for cloud development. The company previously announced billions in investment to expand Softlayer cloud data centers and commercialize the Watson cognitive computing technologies.

"We have transactional businesses that are shifting to higher value, and we're continuing to evolve the portfolio, investing in capabilities in some areas while divesting businesses that don't support our shift to high value," Schroeder explained in a conference call with financial analysts.

Strategic areas for IBM including cloud, big data, analytics, mobile, and security all saw "good growth," according to Schroeder, with SaaS subscriptions growing nearly 40%. But the gains in these areas, which are pockets within IBM's larger business units, could not overcome lagging demand for other products and services.

This has been the general pattern for more than two years. But with the hardware and China markets stabilizing and growth areas rising at double-digit rates, Schroeder saw hope that "performance will accelerate in the second half."

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Doug Henschen is Executive Editor of InformationWeek, where he covers the intersection of enterprise applications with information management, business intelligence, big data and analytics. He previously served as editor in chief of Intelligent Enterprise, editor in chief of ... View Full Bio

Services, yes, but I would say the Apple deal has a whole lot to do with that line item that shows software gross margins at 88% but no growth. It needs to sell more of its analytics software, more mobile management software, and the like.

>Not long ago, when you got new PC you could easily see difference to old PC. Booted faster, ran apps faster, etc. Now when you switch them out, you don't even notice the difference.

Processors are not what you notice most in desktop PC speed. SSDs make a huge difference in boot time and responsiveness over HDDs. I would argue companies should buy moderately powered PCs with SSDs to replace any existing computer with a HDD. For those moving up from HDDs, the experience will be so much better and work will get done so much faster that the employer will see real productivity gains.

They get some revenue from that. I keep both hardware and software maint contracts with IBM. But it is chump change, both cost me about $3500 per year. As machine ages, hardware portion goes up some but nothing substantial. That can't make up for server falling from $90K to $10K.

You are starting to see that in the PC market also. These things are so good now you can run them for 5+ years now if you want. Even our Corp std replacement policy is now 4 years on desktops, 3 years on laptops. I've argued (and lost) we could stretch longer than that.

Not long ago, when you got new PC you could easily see difference to old PC. Booted faster, ran apps faster, etc. Now when you switch them out, you don't even notice the difference. I think this is hidden factor when people write about the "decline" of the PC, very much like POWER where you just don't buy them as often. And they get cheaper everytime also, although not to magnitude of these POWER servers.

They can setup lifetime support agreements that include equipment upgrades and replacements as new equipment and software become available. This way you don't have sales "spikes" with new products you have nice and smooth cash flow year after year with growth comming from new clients (with slightly more expensive contracts).

As a POWER system customer (i5 o/s in my case), I've made this comment before on articles like this: You only have to buy these things once every 5-8 years. In last 10 years or so, once they reached status where you don't grow out of the CPU and storage, I've moved to a six year replacement cycle. And if business is bad, I have no qualms about stretching another couple of years.

You can't kill these things with a stick, still by far the most stable, most productive business servers in the world. Mainframe capacity/performance that is so productive that many shops have one IT person who doubles as developer/admin, like I do here. And we aren't talking green screen apps anymore, I'm currently connecting Sencha Ext JS apps to the server.

The last point is that, unlike a loaf of bread, everytime I buy one of these it gets cheaper with 10 times the performance/storage of previous server. And I mean WAY cheaper. In 1999, (before they had integrated POWER line), our AS400 was $90K+. In 2004, it was $50K. In 2009, it was $20K. When I buy POWER8 next year, may be as cheap as $10K. How you going to see any revenue growth when that is going on?

The "Customer Care BPO" cited in the chart above as "excluded" is another low-margin business that IBM sold off. In IBM's troubled Power business, the company recently launched the Power8 line, which incorporates big data functionality, and it has open sourced the chip design and platform to a consortium of partners. The hope is to spread the cost and the popularity of this high-performance line which sits in between IBM System Z mainframes and commodity X86 systems.

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